To study the regulation of differentiation of tracheobronchial epithelial cells we have developed an in vitro cell system using rabbit tracheal epithelial cells. We have shown that these cells, under different conditions, can express either a mucous-secretory or a squamous phenotype. Cells grown on a collagen type I gel matrix in the presence of retinoids express the mucous-secretory phenotype. Biochemical analysis of 3H-glucosamine-labelled secretory products shows the release of mucous glycoproteins. Cells grown in the absence of retinoids, either on a collagen Type I gel matrix or on collagen-fibronectin coated dishes, undergo squamous differentiation. This pathway of differentiation is a multistep process. First, cells undergo terminal cell division which is characterized by the accumulation of cells in the Go/G1 phase of the cell cycle and reduction in colony forming efficiency. Terminal cell division normally occurs at high cell density but can be induced at low density either by the removal of epidermal growth factor or by the addition of transforming growth factor beta. Terminal cell division is followed by the expression of a squamous phenotype which is characterized by the appearance of a squamous morphology and changes in several biochemical markers. The formation of cross-linked envelopes is the last stage in this terminal differentiation. The commitment to terminal cell division is insensitive to retinoids whereas the expression of the squamous phenotype is under the control of retinoids. The differential effects of retinoids on the commitment to terminal cell division and expression of the squamous phenotype indicate that the control of the two events are separable; however, other evidence shows that they are regulated in a coordinate manner. We developed a cDNA library from poly(A)+ RNA isolated from squamous differentiated cells and obtained cDNA clones that hybridize with mRNAs that are expressed in squamous differentiated cells but not in undifferentiated or retinoic acid-treated cells. Study of the regulation of these genes are in progress.